Am I Covered for Water Damage in my Restaurant?

September 01, 2015

by Sean Pechan, Colorado Restaurant Insurance Agency

Water damage can pose serious risks to any restaurant, whether coming from inside the restaurant through a burst pipe, or coming from outside like a flood. Considering most policyholders find that understanding the inclusions and exclusions of coverage in their insurance policy results in frustration, the role of any insurance agent is to discuss the policy specifics in more understandable terms. I want to take the opportunity to simplify the conversation of water damage coverages and exclusions on a typical commercial insurance policy.

Water Damage and Commercial Property Insurance

Because of the vast number of ways someone can experience water damage in their establishment, there is no industry-wide description of water damage coverage in commercial property insurance. There are commercial property policies that include coverage for specific kinds of water damage and then also some limited commercial property policies that do not include coverage for any water damage. Consulting with an insurance agent can help you get to the bottom of exactly what is and isn’t covered by any given policy.

While there may not be a standard water damage policy throughout the industry, there are a few reoccurring water damage risks that insurance may be able to mitigate.

Bursting Pipes

As we know in Colorado, an early or late freeze may result in burst pipes which can lead to significant water damage. While most commercial property policies will cover the damage caused by bursting pipes, they will not cover the loss if the pipe froze as a result of negligence or absence of the policyholder. This means that during the cold months it is the responsibility of the insured business to take appropriate steps to prevent the pipes from freezing and bursting.

Gradual Leaks

Sometimes a more frightening scenario occurs when damage is caused by a pipe or hose slowly leaking over a period of time. Coming from any number of appliances or plumping systems, this type of leak can be difficult to discover and may eventually be just as costly as the damage caused by a burst pipe.

Most commercial property policies will NOT cover losses caused by water leakage or seepage that is gradual, slow, intermittent, or constant if the damage could have been prevented by regular maintenance and preventive measures. There is a big difference between a pipe that suddenly breaks or bursts (which is often a covered peril) and a pipe that gradually degrades or breaks down (usually not a covered peril). As always, the wording of your policy is crucial. Make sure you find out what types of situations your policy covers before you actually have to deal with a claim.

Water Damage Exclusions

Every commercial property policy has different exclusionary language they use to identify scenarios which are not covered by the policy. An example of exclusionary language used in a commercial property insurance policy may appear as follows:

ABC Insurance Company will NOT pay for losses occurring when damage is caused directly or indirectly by:

flood, surface water, waves, tidal water or overflow of any body of water, or spray from any of these, whether or not driven by wind.

water or water-borne material which backs up through sewers or drains, or which overflows or is discharged from a sump pump, well or other system that is designed to remove subsurface water which is drained from the foundation area; or

water or water-borne material below the surface of the ground, including water which exerts pressure on, or flows, seeps or leaks through any part of a building, sidewalk, foundation, driveway, swimming pool or other structure or water that causes earth movement.

Again, in order to make sure you are covered for situations specific to your establishment we recommend discussing your particular needs with your insurance agent.

Floods

As Colorado knows all too well, floods cause serious damage to businesses. According to floodsmart.gov: “From 2008 to 2012, the average commercial flood claim was more than $75,000.” As we have reported before, commercial property policies typically exclude coverage for the peril of flood. To protect a business from the risk of floods, qualifying businesses can purchase a flood insurance policy from the National Flood Insurance Program (“NFIP”) or from a private insurance company (though this is less common). Be aware that there is normally a 30-day waiting period before a flood insurance policy goes into effect.

Sewer and Drain

In the unlikely and unfortunate event of a backed up sewer drain, most commercial property policies specifically exclude losses caused directly or indirectly by water or water-borne material (e.g. sewage) backing up through sewers or drains.The exclusion usually means there is no coverage regardless of whether the clog was located in a drain on your premises or if the source of the backup was located outside your property in a utility or municipal sewage/drainage pipe. If you want to be covered for these losses, many insurers will allow you to purchase an endorsement (or rider) that basically eliminates the normal exclusion for sewer or drain back ups and overflows.

Hopefully this brief overview provides some understanding to how an insurance policy would respond to different claim scenarios involving water. For more information, or to contact an insurance agent who understands the perils and coverages of water please contact Sean Pechan or Kirk Bamesberger at the Colorado Restaurant Insurance Agency at 303-830-2972.

Source: Many items mentioned in this article were first published on enhancedinsurance.com.

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